1998 (4) TMI 127 - HC - Income Tax

Employer house-building loans at below-market interest: interest subsidy not treated as salary perquisite for s.192 TDS

The dominant issue was whether the interest subsidy arising from employer-provided house building loans at below-market interest constitutes a ... Tax Deducted At Source - Salary - Profit In Lieu Of Salary - difference between the rate of interest charged by the financial institutions and the rate of interest at which the house building loans - claiming that the interest on reimbursement is not a perquisite and prays for a declaration that the said letter is illegal and ultra vires the provisions of the Income-tax Act - Whether the grant of house building advances at a rate of interest below the market rate is a perquisite had been debated and the view of the Government itself was that the statutory provisions did not treat it as a perquisite - HELD THAT:- The common understanding is that it is a periodical payment and does not include other special payments even though they may be from an employer to an employee and also because of that relationship. It is only with a view to bringing in such other payments into the scope of that word 'salary' that it is defined to include perquisites and profits in lieu of salary. Thus, the context itself shows that the meaning of the word 'salary' is confined to what in the popular parlance is the monthly payment for service rendered and cannot include interest subsidy. There is no reason why such a verified statement should not be given for the purpose of reducing the salary income liable for deduction of tax at source. In doing so, the employee will be taking a great responsibility because if the income is otherwise taxable, he will be liable to pay larger advance tax and for default or deferment, such advance tax will be liable to pay interest under sections 234B and 234C. A reference to other sections such as section 197A indicates a common pattern of allowing the assessee to determine the liability for deduction of tax at source. Under section 197A, no tax is to be deducted at source if the assessee gives a declaration in writing that his estimated total income will not be liable to tax. This stands to reason because it is the assessee who has to declare his taxable income and not the employer or the payer. In the present case, there are three decisions of the High Court against the Revenue and it has not been shown that any of them have been taken to the Supreme Court. When we sought information about it, we were told that such information is not available. There was a practice in the Department to publish departmentally a list of decisions of the High Courts accepted by the Department so that the field officers may not rake up the subject again involving the Department in needless litigation. We are told that such a system has now been abandoned. Our own reference to the Judis Computer data bank indicates that no appeal is pending in the Supreme Court with reference to the interest subsidy. It is unfortunate that the Revenue should instruct the senior standing counsel to argue this matter in spite of having accepted the decision of the High Courts and in spite of the Chairman of the Central Board of Direct Taxes having issued a letter assuring action against officers acting to the contrary. As it appears that such a discussion had taken place and the Chairman, Central Board of Direct Taxes, had given an assurance in this regard on July 13, 1990. In spite of that, the Department had proceeded to instruct the employers on March 23, 1995, to treat the interest subsidy as a perquisite for deducting the tax at source. The comprehensive Circular No. 701, relating to tax deducted at source subsequently issued on March 23, 1995, being silent on this point, we have to appreciate senior standing counsel for actually performing a public service by forcefully bringing out the internal contradiction between the letter of the Chairman, dated July 13, 1990, given in conformity with the directions of the Supreme Court, and the impugned letter of the Central Board of Direct Taxes, dated March 23, 1995. In the circumstances there shall be a direction to the respondents not to treat the interest subsidy as a perquisite while deducting the tax at source in respect of income under the head 'Salaries' under section 192 of the Income-tax Act. The first respondent-finance secretary is directed to place this judgment before the Union Finance Minister so that he is apprised of the need for reform in the area of 'deduction of tax at source'. The writ petitions are allowed. Issues Involved:1. Tax Deduction at Source (TDS) on Interest Subsidy.2. Classification of Interest Subsidy as a Perquisite.3. Discrimination in Tax Treatment of Identically Placed Assessees.4. Adjudication Mechanism for TDS.5. Technical Objections Raised by Revenue.Summary:1. Tax Deduction at Source (TDS) on Interest Subsidy:The petitions challenge the Central Board of Direct Taxes (CBDT) directive that reimbursement of interest on house building loans by the employer should be treated as taxable income from 'salaries' u/s 17(2)(iii) of the Income-tax Act. The petitioners argue that such interest subsidy is not a perquisite and seek a declaration that the CBDT's letter is illegal and ultra vires.2. Classification of Interest Subsidy as a Perquisite:The court examined whether the interest subsidy qualifies as a perquisite u/s 17(2)(iv) and concluded that it does not. The court noted that the legislative history, including the introduction and subsequent withdrawal of sub-clause (vi) in section 17(2), indicates that interest subsidy was never intended to be taxed. The court also referred to the Karnataka High Court's decision in P. Krishna Murthy v. CIT [1997] 224 ITR 183, which held that such subsidies are not taxable.3. Discrimination in Tax Treatment of Identically Placed Assessees:The petitioners argued that treating interest subsidy as a perquisite in some cases but not in others is discriminatory. The court agreed, noting that if the subsidy given directly is not taxed, it should not be taxed when given indirectly. The court emphasized that even if two views are possible, the one in favor of the taxpayer should be adopted.4. Adjudication Mechanism for TDS:The court criticized the lack of a proper mechanism for adjudicating disputes at the time of TDS. It suggested that the employee should inform the employer about the estimated salary income liable for TDS. The court also pointed out that the employer should not be penalized for shortfall in TDS due to differences in opinion on taxability. The court proposed a possible solution where the stage of deduction could be shifted to the hands of the payee, ensuring a more efficient and fair system.5. Technical Objections Raised by Revenue:The Revenue raised several technical objections, including the maintainability of the writ petitions and the appropriateness of the remedy. The court rejected these objections, stating that the chaotic functioning of the Department and the coercion faced by employers necessitate judicial intervention. The court also upheld the right of trade unions to file writ petitions on behalf of their members.Conclusion:The court directed the respondents not to treat the interest subsidy as a perquisite while deducting tax at source u/s 192 of the Income-tax Act. It also directed the Finance Secretary to place this judgment before the Union Finance Minister to consider reforms in the area of TDS. The writ petitions were allowed with costs of Rs. 1,000 each.